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Basic Information

Crudely put, arbitrage is the practice of buying low and selling high - of making a profit from the price difference between two different markets. For example, buying a commodity such as grain in a rural area where it is widely produced and where supply far exceeds demand and selling it in an urban area where the reverse is true, taking a profit of the price difference less the cost of transport. In theory any commodity (including currency itself in a capitalist economy) can be arbitraged given a suitable price gap and most successful trade is at least partially based on it (with the remaining cases being those where the "merchant" is merely a distributor and takes their "profit" by way of a handling fee).

It is worth noting that arbitrage is a threatening concept to anyone with a fixed value system of economics - such as most primitive models and Marxism - to whom a difference in price must necessarily imply that someone is being cheated.

One of the more problematic aspects of arbitrage, however, is when it exploits price differences within a single market (effectively two single markets separated by time rather than distance) - normally those generated by changes in supply and demand - and given that this can include hoarding commodities until they become scarce and some aspects of market rigging, this may have helped to generate some of the historical suspicion.

Sources

Bibliography

1. full source reference

Game and Story Use

Expect a suspicion or outright condemnation of arbitrage to be congruent for a medieval setting (or one that has degenerated into Marxism). Unsurprisingly, this is liable to hamper trade.

This was the case in many times and places historically. Luckily our ancestors seem to have been roughly as capable of hypocrisy as we are so trade developed anyway.

Note also, however, that distributive trade has been - and remains - quite common. This, after all, is how the majority of modern retailers work (the arbitragers in the modern retail market are usually the ones that import weird foreign brands to sell in their discount shop).

Arbitrage can also be a source of intrigue, as with other forms of speculation. Especially in an era where news can only travel as fast as a courier.